Under the Corporations Act 2001 (the Act) there are several provisions which have the effect of preventing an entity from continuing or commencing legal proceedings against a company in external administration.

Voluntary Administration

Section 440D of the Act states that:

During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:

With the administrator’s written consent; or

With the leave of the Court and in accordance with such terms (if any) as the Court imposes.

Subsection (1) does not apply to:

A criminal proceeding; or

A prescribed proceeding.

There are currently no prescribed proceedings under the Corporations Regulations 2001.

Section 58AA of the Act defines “court” as “any court”. This is contrasted with the definition of “Court” in section 58AA of the Act which is defined as the Supreme Court, Federal Court or the Family Court of Australia. Case law has interpreted the definition of “court” to also include various tribunals and commissions depending on the statutory nature of the duty and the powers of those quasi-judicial bodies.

Winding up in insolvency or by the Court

Similar to voluntary administration, section 471B of the Act states that:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of the company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company or in relation to property of the company; or

(b) enforcement process in relation to such company,

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

This section is similar to section 440D of the Act, however it does not allow for the administrator to consent to legal proceedings being commenced or continued.

Voluntary Liquidation

There are two types of voluntary liquidation, and depending on which method is being used, determines what kind of legal proceedings are stayed. These two types are:

Members’ voluntary liquidations; and

Creditors’ voluntary liquidations.

A members’ voluntary liquidation is the process for a solvent company and occurs when its members no longer wish to continue trading due to a variety of reasons, including, but not limited to, retirement, changes in economic or environmental factors or internal conflict.

A creditors’ voluntary liquidation occurs when the shareholders of a company determine that the company is insolvent and cannot continue its operations or be rehabilitated. There are also various forms of a creditors’ voluntary liquidation.

Section 500(2) of the Act states that:

After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

This section appears under the heading “Creditors’ Voluntary Winding Up” in the Act. In Awada v Linkdarf Ltd (in liq) [2002] NSWSC 873 the New South Wales Supreme Court held that section 500(2) of the Act applied only to creditors’ voluntary liquidations and did not extend to members’ voluntary liquidations. As a result, during a members’ voluntary liquidation, there is no stay that prevents the commencement or continuation of legal proceedings against a company in liquidation.

Conclusion

In summary, various actions are stayed during the different types of external administration. In a court ordered liquidation, section 471B prevents both civil and criminal proceedings from being commenced or continued. This is contrasted with a voluntary administration that does not prevent criminal proceedings from being commenced or continued. Further, a creditors’ voluntary liquidation, through the use of section 500(2) of the Act, prevents civil proceedings from being proceeded with or commenced whereas a members’ voluntary liquidation has no such protection.

If you have any questions regarding insolvency or bankruptcy, please don’t hesitate to contact me.

About the Author

About the Author: Angelo Venardos is a Director at Sajen Legal and a part of the Business and Corporate team. Since being admitted to practise law in 1991, Angelo has practised in the private, public and not-for-profit sectors and, in doing so, gained an exceptionally diverse range of experience and expertise. Within the private sector, Angelo has acted in many complex disputes and transactions for a broad range of clients. More from this author.

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Thank you for the information but still I have a doubt about Creditors Voluntary, Is Creditors Voluntary Liquidation CVL an insolvent liquidation where the company cannot pay its debts effectively meaning the company will cease trading?

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